Original links are included though some may have expired.

The Numbers:

License fees as percent of final DVD-player sales price, 1999: 5-10%
License fees as percent of final DVD-player sales price, 2007: 20-30%

What They Mean:

Down the coast of China, from Tianjin through Shanghai and Fuzhou down to Shenzhen, about 150 manufacturers pump out about four-fifths of the world's DVD players. Last year, 46 million of them went to the United States, at a border cost of $3.4 billion. The transaction seems relatively simple: a visible physical flow of DVD players from China to the port at Long Beach and a second flow of cash from American retailers back to China, both recorded in trade statistics by Customs Agents and announced by the Bureau of Economic Affairs each month. But beneath both lie some deeper currents that trade statistics do not record.

The Chinese manufacturers, at least for now, are not creators of the players. Instead they are contractors for a dozen or so big Japanese, Korean , U.S. and European brands. These rich-world firms design the DVD players and own the patents for the core technologies -- reading discs, compressors for digital data, conversion processes for images, etc. -- the players contain. Since the 1990s, the brand firms have set royalty fees for these technologies by organizing themselves into "patent pools" which negotiate royalty payment levels for dozens of complementary patents at once. The largest of the three leading patent pools is known as 6C and joins seven Japanese companies with one American firm and one Korean company. (Hitachi, Matsushita (Panasonic), Mitsubishi, Samsung, Sanyo, Sharp, Toshiba, JVC, and Warner Bros.) It issues the DVD6C Patent License for discs and players that conform to DVD-R or DVD-RW standards. The other two big pools are 3C and MPEG LA. Together the three own the 396 essential patents (180 for 6C, 131 for 3C, and 85 for MPEG) needed in almost all DVD's. Smaller pools led by Thomson and Dolby Labs also charge independent royalties, among other things for VCD compatibility, parental management support, and encryption technologies.

Royalty payments for these patents mean that a large fraction of the money paid by retailers to manufacturers does not stop in China, but instead flows through and back out. The store price of a typical player has dropped since 2000 from $300 to $70-$90; and the total payments to patent pools for a single DVD player range from $14 to $27, or from a fifth to two-fifths of the sales price. They break down as follows:

6C: 4 percent of sale price per player; minimum $3, maximum $8.
3C: 3.5 percent of sale price per player, minimum $3.50
MPEG2: $2.50 per player
MPEG4: $0.25 per player for decoders and another $0.25 for encoders.
Thomson: $1 per player.
Dolby: $0.71 for 2-channel decoders and encoders.

The patent fees, meanwhile, are only one payment. Others, depending upon the type and sophistication of DVD player involved, go to software publishers from the United States; chip manufacturers and designers in the U.S., Japan, Korea and Taiwan; and trademark holders. Much the same happens across MofCom's reported $230 billion in Chinese electronics exports: TV sets, phones, digital cameras, VCRs, mobile phones, PCs, fax machines, and more. In effect, the river of cash flows into China as the DVD players flow out; and a good deal of it stops there and pools to finance the 1500-foot skyscrapers, magnetic levitation trains, and museums stocked with Shang bronzes sprouting alongside the factories on the Chinese coast. But more than most realize flows straight through, beyond the reach of trade statisticians, and back out to Japan, Korea, Taiwan, Europe, and the United States itself.

Further Reading:

Your player -- FAQ on "Who invented DVD, and who owns it," from Jim Taylor, author of DVD Demystified (2000) and Everything You Ever Wanted to Know about DVD (2003):
http://www.dvdreview.com/faq/dvdfaq.shtml

A Chinese complaint -- China-based manufacturers argue that their profit margins have vanished, as royalty payments remain constant while DVD prices fall. The China Daily reports on an anti-trust suit filed by China's DVD-makers against the patent pools:
http://www.chinadaily.com.cn/english/doc/
2005-02/02/content_414284.htm

And another -- Chinese professors sue Philips to remove an invalid core DVD patent from the 3C Group's joint license. "Challenging Royalty Fees," also from China Daily:
http://www.chinadaily.com.cn/bw/2006-12/18/content_761240.htm

A look into the pools:

DVD6C Licensing Agency royalty rates:
http://www.dvd6cla.com/royaltyrate.html
MPEG-2 categories and royalties:
http://www.mpegla.com/m2/m2-agreement.cfm
MPEG-4 categories and royalties:
http://www.mpegla.com/m4v/m4v-faq.cfm
Thomson Multimedia royalty rates:
http://mp3licensing.com/royalty/

More perspective:

PPI ponders an emerging "Asian Union," 2004:
http://www.ppionline.org/ppi_ci.cfm?knlgAreaID=108
&subsecID=127&contentID=252629

Book recommendation -- Ching-Kwan Lee's Gender in the South China Miracle looks at the lives of women electronics workers in Shenzhen, circa 1998:
http://www.amazon.com/Gender-South-China-Miracle-Factory/
dp/0520211278/ref=sr_1_1/104-4312039-8358363
?ie=UTF8&s=books&qid=1182272344&sr=1-1

Note: Research and drafting for this Fact by PPI summer research associate Phoebe Leung Hau-Man.